June 17, 2010

So, I need somebody to explain this to me, because I can’t figure it out. I must be missing something elemental. In basic supply and demand, when the quantity of a product decreases and the demand stays the same, the price of the product increases, correct?

BP’s oil fiasco began on April 20, 2010 and the latest estimate by the government is that the spill is spewing out 60,000 barrels of oil per day. It has now been 60 days since the explosion, which means approximately 3.6 million barrels of oil could have been lost due to this disaster. With an annual import of approximately 4.3 billion barrels of oil a year and domestic production of about 1.9 billion barrels, this 3.6 million barrels is only .05% of total U.S. oil consumption (assuming all that is produced and imported is consumed). The spill hasn’t been stopped yet so this number could go up.

This .05% is a small amount of the total so I would expect either no effect on the price of oil or a maybe a small effect. What confuses me is that in the above graph of the crude oil price over the past year, the price dropped significantly around the time of the crisis. Why would the price drop? Shouldn’t the price at least increase because of a loss in supply? What am I missing?

June 11, 2010

GM's Chevrolet Volt

I just ran across this article today and it disappointed me. Ever since I first heard about the details for this car, I’ve been excited about it because of its potential to usher in the EV market. The car is the perfect vehicle to transition people from gas vehicles to electric vehicles. For those of you who don’t know how the Volt works, it basically has an all-electric range of 40 miles (most people drive less than this in a day), after which the gas engine kicks in to charge the battery instead of drive the car. This differs from plug-in hybrid electric vehicles in that the gas and electric engines are in series instead of parallel. In plug-in hybrids and hybrids, the engines are parallel and the purpose of the electric engine is to offset the load on the gas engine. This vehicle allows someone to drive only on electricity for most days and then let the gas engine kick in for road trips.

So why am I disappointed? Just as GreenTech Media has also figured out, that article shows that GM isn’t taking their Volt seriously. Their argument is that the demand isn’t there and they will only increase production when demand increases but always “want to keep VOLT in a position where demand for the product is slightly greater than supply.” However, I think this is a surefire way to keep people from transitioning to EV as they will always be seen as niche products for people with disposable income. GM has the ability to produce a massive amount of Volts and lower the price so everyone can afford it, but it just becomes a question of their willingness. This is where I hope the fact that the government is a majority shareholder plays a role.

Back in the 90s, GM developed the GM EV1 electric vehicle that was the precursor of this Chevy Volt. They released only a few vehicles to conduct a pilot test in California and every driver of that vehicle loved every bit of it. Then for no reason at all, GM canceled the car and destroyed all the EV1 vehicles and went forward with their SUV/Hummer strategy. The demand was there, customers wanted it, yet GM said no. We could be driving EVs today if it wasn’t for GM saying no. I’m afraid they are going to kill the Volt in the same way. Remember, customers only want what you give them. Give them the choice of the Volt at a reasonable price and you will see that they will sell.

I’m sensing that there might be a double standard here. The fine Toyota received is the largest fine issued to an auto company and it makes me wonder if all this was part of the recent increase in “Buy American” sentiment over the past couple of years. The Toyota issue didn’t make their cars that much more dangerous. Carnegie Mellon did a study that found that driving a recalled Toyota vehicle only increased the risk by 2% while walking instead of driving the recalled vehicle increased risk by 1900%. In summary, the Toyota recall ended up being exaggerated tremendously by the media and government.

Only time will tell now whether GM and Chrysler, both companies that the government has a stake in, will be subject to the same treatment Toyota had to deal with a few months ago.